Market report: US homes slump gathers pace as UK builders merge

After early gains, bad news about the US housing market caused a sell-off in global markets. The FTSE 100 dropped from being up 16 points at lunchtime, to close down 47.5 points at 6291.9. The FTSE 250 slid 46.4 points to 11655.

US sales of new homes plummeted to their slowest pace in almost seven years in February, dimming hopes of a rebound in the troubled housing market. The Dow had lost 76 points to 12405 as the market closed in London, while the S&P 500 was down 6.9 at 1429.2.

Ironically, housebuilders were among the strongest names in the UK as the merger between Taylor Woodrow and George Wimpey fuelled hopes of further sector consolidation.

Investors welcomed the deal, pushing Taylor Woodrow up 54½ to 475p and George Wimpey up 18 to 653p.

Goldman Sachs said it believes the merger would create good regional overlap in both the UK and US, and sees potential for synergies to exceed £50m.

Persimmon topped the blue-chip leader board, up 37p to £14.37, as traders speculated that the company may jump in with a cash offer for Taylor Woodrow. Goldman Sachs analysts said they thought Persimmon had the financial strength to complete such a deal.

In the wider property sector, Hammerson jumped 5pc to £18.36 in early trading amid talk that private equity firm GE Real Estate was teaming up with French property giant Unibail to launch a break-up bid for the UK group, but the stock later dropped back to close up just 2p at £17.47.

The markets were also shaken by news emerging from Iran, where 15 members of the UK military are being held captive.

The country said over the weekend that it would limit co-operation with the UN's nuclear watchdog and vowed not to halt its atomic programme "even for one second" after the imposition of new sanctions.

Oil prices struck the highest points so far this year, topping $64 a barrel in London. Royal Dutch Shell gained 7p to £16.77, while BP ticked up 1 to 542½p.

British Airways, meanwhile, was hit by the threat of higher fuel prices and slid 13½ to 504½p.

Collins Stewart downgraded the publisher of the Financial Times from buy to hold on valuation grounds, but said a private equity house may still be eyeing a break-up of the company.

On the loser board, Whitbread fell 49p to £18.88 as investors digested the news that it had received several unsolicited approaches to acquire the company's David Lloyd Leisure business. One trader said that the market would be disappointed that only David Lloyd and not the whole group was up for sale.

Banks fell back after their rally last week spurred by M&A chatter.

Barclays shed 16½ to 741½p on news that Dresdner Kleinwort had downgraded the stock from add to hold on valuation grounds. The broker recommended that investors switch into Royal Bank of Scotland, down 37p to £20.17, HBOS, 7p weaker at £10.58, or Northern Rock, down 10p at £11.56.

Dresdner assumes a 50pc probability of success for Barclays' merger talks with ABN Amro, but adds "if value destruction can be deemed a success".

Dresdner was similarly negative about Alliance & Leicester, which dropped 20p to £11.39. The analyst downgraded the stock from add to hold as it played down ongoing hopes of M&A activity.

AstraZeneca dropped 37p to £27.62 on reports that its Crestor cholesterol-reducing drug failed to meet its main target. But analysts at Bear Stearns said the dip should provide a buying opportunity as the long-term fundamentals for the stock remain intact.

Further down the market, Weir Group lost 5½ to 601½p after it failed to sell its Glasgow-based unit of Weir Pumps to the Swiss engineering group Sulzer due to a disagreement over terms.

Weir announced that it was in talks about a sale for around £48m in February. The company said the most likely future of the unit would be an investment in a dedicated facility in Glasgow to make spares.

Property investment company Minerva dropped 7¾ to 380p despite swinging into the black in the first half. Investors were concerned about the lack of news on two of the group's flagship projects.

And electricals retailer Kesa was hit by negative broker comment, shedding 8¾ to 340p. Credit Suisse downgraded the stock from neutral to underperform, while Bridgewell Securities cut it from neutral to underweight.

The latter said that while it cannot discount the possibility of a bid, the stock is overvalued.

On the Aim market, Surface Technology Systems, which makes machines used in the production of semiconductors, watched its shares tumble 6½ to 16p after it said it had noticed some softening in the market.

STS also postponed the announcement of its final results as the auditors have not yet signed off an appropriate value for the company's assets to be carried into next year.

Cash machine operator Cashbox fell 3½ to 20p after the company said that the preliminary offer talks announced last month had ended as discussions were not proceeding as quickly as the board would have liked.